What’s An Executory Contract And Why Should You Care?

Content

• What is an Executory Contract?
• Are Executory Contracts legally enforceable?
• When do you need an Executory Contract?
• How do you efficiently manage Executory Contracts?
• Drafting Agreements
• Effective Documentation
• Performance Management
• Productive Collaboration
• Compliance Management
• Conclusion

Anyone looking to rent a commercial or residential property must sign a lease agreement. These written contracts between the landlord and the tenant will specify the terms and conditions, including lease duration, maintenance responsibilities, and rent amount.

These commitments are not one-time events. They cannot pay their rent or do upkeep once and then ignore it. Both parties have to continue to perform their duties throughout the leasing period. Such dynamic and ongoing agreements fall under the executory category. This blog post will discuss their nature, purpose, enforceability, benefits, and best practices.

What is an Executory Contract?

An executory contract is an ongoing legal arrangement in which one or more parties have yet to fulfill their contractual duties. It means the contractual relationship is still in progress, and the involved parties will perform specific terms and conditions over time.

The unfulfilled obligations can range from payments to services to deliverables. The parties can set a timeframe for the pending duties to avoid non-performance. It protects the rights and responsibilities of everyone involved in the contractual agreement. Thus, they can claim breach of contract if any party fails to perform their duty and take legal action. Familiar executory contracts include leases, intellectual property licenses, and employment contracts.

Are Executory Contracts legally enforceable?

Executory contracts are legally enforceable if they meet all the requirements. There must be an offer, acceptance, consideration, capacity, consent, and awareness. Until all parties fulfill their obligations, the terms and conditions remain legally binding.

In the event of a breach of contract, the non-breaching party may seek remedies through litigation. They can opt for damages, termination, or specific performance. However, when unforeseen circumstances or events make it impossible to perform the obligations, parties can discharge the contract due to frustration. For instance, if the changing regulations make the contractual terms illegal, courts may release involved parties from fulfilling their duties.

When do you need an Executory Contract?

Often, parties perform all their duties soon after signing the contract. For instance, the contract is complete if you make a purchase and pay full payment then and there. However, in specific commercial or personal contracts, the performance of obligations happens gradually. Executory contracts are convenient in these situations.

• Real estate Agreements

Buyers and sellers enter into an executory agreement during a real estate transaction. The purchase agreement remains in the executory stage until the buyer pays and the seller transfers the property. Both parties must carry out their duties, as the contractual obligations are legally enforceable. 

• Construction Contracts

In construction projects, the services and payments happen over time. Hence, construction contracts specify the ongoing obligations and schedule to ensure successful project completion. Thus, the executory contract allows parties to manage expectations and rights.

• Employment Contracts

When organizations onboard employees for a service, they’re entering into an executory agreement. These employment contracts specify terms and conditions that both parties must uphold throughout the employment period. While employees perform their duties, the employer is responsible for paying them regularly. The ongoing obligations make these contracts executory.

• Installment Contracts

Installment agreements for loans, mortgages, and paychecks are executory. These contracts call for goods, services, or payment delivery in a series rather than all at once. You can generally find installment arrangements in wholesale, sales, and service agreements. It makes budgeting painless and more flexible for all parties involved. Both parties have continuing responsibilities, and contract violations may result from non-performance.

• Lease Agreements

Lease or rental agreements, whether for cars, property, or equipment, all fall under executory. The obligations specifying upkeep, payments, and so on are legally binding throughout the rental period. Thus, both parties have protection and must uphold the commitments to avoid breaches.

• Executory Contracts in Bankruptcy

Executory contracts are a staple in bankruptcy proceedings in the US. When an organization files for bankruptcy, they have to decide whether to accept, reject, or assign executory agreements. The debtors can assume and continue to perform their contractual obligations. Usually, they prefer to accept executory contracts beneficial to their business and reject those against their interests. 

• Intellectual Property Licenses

Intellectual property licenses utilize executory contracts to regulate trademarks, patents, and copyrights. It allows licensees and licensors to specify the terms and conditions for licensing intellectual property. They have ongoing obligations and royalty fees throughout the contractual relationship.

How do you efficiently manage Executory Contracts?

Executory contracts are quite different from general legal agreements. The non-executory contracts are a done deal soon after signing when the parties perform their duties. For instance, sales or service agreements are fully executed in one go, and parties don’t have to worry about ongoing obligations. However, executory contracts have responsibilities underway, which parties must keep track of to avoid contractual violations. That is why, from drafting to post-execution management, these contracts require parties to do their due diligence to achieve the desired results. 

• Drafting Agreements

Organizations employ executory contracts for a wide variety of purposes. As such, each agreement may have a different structure, language, and content. The contractual agreement must contain the parties' contact details, a good or service description, contract duration, and a payment schedule. While drafting the contract, the parties must include terms to mitigate risks and disputes. For instance, specifying resolutions for contract breaches can help prevent future disagreements.

Organizations can utilize digital templates for various purposes, from real estate to installment agreements, to ease the process. Thus, they don’t have to create documents from scratch each time; these templates are customizable to fit unique circumstances. They can standardize them across the board with elements relevant to the business. Apart from templating capabilities, contract management software like Dock 365 enables users to maintain a clause library with essential terms and conditions.

• Effective Documentation

As the obligations in executory contracts are in progress, organizations must stay on top of them throughout the contractual relationship. It enables them to keep track of their rights and responsibilities. Or they face the risk of legal, financial, operational, and reputational damage due to contract breaches. However, ineffective documentation and storage across diverse folders and systems can make it challenging to uphold terms and conditions.

Organizations can overcome these challenges by centralizing their contracts and legal documents in digital repositories. It enables them to maintain their executory contracts in a searchable and secure location. As a result, they can monitor ongoing obligations, amendments, and contractual milestones. It keeps non-compliance, redundant work, and contract violations at bay.

• Performance Management

Constantly monitoring performance and compliance is a necessity for executory contracts. These contracts provide for the gradual performance of obligations and payments. Organizations are prone to forgetting specific rights or responsibilities when managing hundreds of active contractual documents.

Automating performance management can go a long way toward ensuring businesses achieve the desired results. For instance, Dock 365 allows users to extract and track relevant obligations automatically. The AI capabilities can identify and retrieve pertinent clauses from a huge volume of legal agreements within minutes. They can assign deadlines and reminders to guarantee timely performance. Thus, parties can keep up with the timeframe of executory contracts without failing. 

• Productive Collaboration

Executory contracts can have financial, operational, and legal implications for a company. That is why departments across the organization must have access to these documents and their outcomes. Effectively managing contractual relationships also requires staying in touch with counterparties, such as vendors, customers, or partners. However, disjointed systems and processes can get in the way of effective communication and collaboration among stakeholders. 

Dock 365, built on Microsoft 365, facilitates a constant flow of information among parties. It allows users to leverage Teams and Outlook to collaborate on the entire contract lifecycle. They can share data, documents, and workflows in real-time. The contract management platform seamlessly integrates with ERP and CRM systems to encourage two-way data sync. Thus, everyone stays on the same page when it comes to the management and implications of executory contracts. 

• Compliance Management

Executory contracts must comply with organizational, industrial, and legal regulations. These compliance requirements range from drafting legally valid terms to ensuring all parties uphold contractual obligations. For instance, healthcare contracts must adhere to HIPAA and the HITECH Act. Non-compliance can lead to violations, disputes, and litigation. If businesses want to stay within the law, they must monitor these evolving policies and regulations.

Dock 365 makes it easy for organizations to establish compliance by automating review, tracking, and reporting contractual terms. Moreover, users can utilize Microsoft’s compliance capabilities to ensure executory contracts align with legal requirements. It can support industry-specific, regional, and national requirements of all kinds of companies.

Conclusion

Executory contracts enable businesses to enter flexible commercial relationships. In these agreements, parties perform their obligations within a designated timeframe. Contract violations may arise from either party's inability to fulfill their end of the bargain. 

Dock 365 contract management software enables businesses to effectively manage these legal agreements, from drafting to negotiating to execution to renewal. Organizations can set up automated workflows to accelerate the review and approval processes. They can sign the final agreements within the CMS platform using electronic signature solutions such as DocuSign, Adobe Sign, and Sertifi. There’s a lot more our intuitive system can do to improve your legal tasks.

Explore our competitive plans today to find the solution that suits your business.